Consensus-crushing US CPI figures sent jolts through markets today. Headline inflation for April jumped 0.8% m/m to reach a whopping 4.2% y/y vs. 3.6% expected. That’s the fastest pace since September 2008. Core measures accelerated with 0.9% m/m (0.3% consensus) to a 2.5 decade (!) high of 3% y/y, also topping 2.3% market estimates. While base effects obviously play a large part in April’s speedy price developments, the month-on-month gauges do reveal it’s not only statistics. Let’s dive into some details. Used cars and trucks seared a spectacular 10% m/m (21% y/y) as did transportation services (2.9% m/m, 5.6% y/y), mainly because of a boost in airline fares (10.2% m/m, 9.6% y/y). Energy only supported the year-on-year figure (25.1% y/y but a -0.1% decline m/m). Services inflation (excluding energy-related services) all together rose to 2.5% y/y (0.5% m/m), dragged higher by rising costs in shelter (0.4% m/m). Apparel reversed a two-month decline into 0.3% m/m price increase. Long story short: this week’s inflation angst just got confirmed by the hard data. The market’s reaction was intriguing with US real yields having difficulties seeking direction. An initial 3 bps jump completely reversed in just a matter of minutes before investors pushed them north again. These are markets simply testing the Fed’s new framework and commitment to keep policy ultra-easy for a very long time in a context of inflation running hot. Inflation expectations in any case continue to advance with the 10y breakeven now nearing 2.6%. The more medium-term 5y gauge propelled 10 bps higher to 2.8%, a level not seen since 2005. The US yield curve bear steepens with changes varying from 1.2 bps (2y) to 4.5 bps (10y). Wall Street opens with losses, with tech unsurprisingly bearing the brunt of the shock (Nasdaq -1%). German bond yield rise in sympathy, adding 1.3 bps (5y) to 2.2 bps (30y). European stock markets fainted post-CPI but found composure pretty fast to trade almost unchanged. The EC upgraded its economic forecasts but left little traces on markets (see below). The dollar moved in perfect harmony with real yields. That means the greenback is up against most G10 peers. EUR/USD is testing support at the 1.21 area. The trade-weighted DXY sought to capture intermediate resistance around 90.6 but 90.34 will have to do for now (up from 90.14 yesterday). After taking a little pause yesterday, sterling strengthens further vs. the euro. EUR/GBP is heading south, below support at 0.859 (April correction low) towards 0.857. Intermediate support lies at 0.854 before the 2021 low of 0.8496 comes into focus.
In its spring forecast, the European commission upwardly revised its outlook for the EMU economy to 4.3% in 2021 and 4.4% in 2022 from 3.8% for both years previously. Despite the upwardly revised outlook for growth, Economic commissioner Paolo Gentiloni said that the Commission will later this month recommend to keep the EU fiscal rules suspended also in 2022. The EMU aggregate budget deficit is expected to rise further from 7.2% last year to 8.0% this year, before easing to 3.8% next year. The aggregate EMU public debt is expected to peak at 102.4% of GDP this year. Debt is seen slightly lower at 100.8% of GDP next year. It was 85.8% in 2019. Inflation is forecast to accelerate to 1.7% this year but might slow to 1.3% next year meaning the EC doesn’t expect the 2.0% inflation target to be reached in a sustainable way either.
CPI inflation in India in April declined to a three month low at 4.29% Y/Y from 5.52% Y/Y in March, still slightly above market expectations. Even so, the Finance Ministry warned about input price pressures from higher commodity prices and supply chain disruptions. The data is the last CPI release before the RBI meeting early June. The decline in inflation was mainly due lower food and beverage prices (2.7% Y/Y). In a separated release, industrial production was reported to have risen 22.4% Y/Y due to favourable base effects. The subcategories mining (6.1%), manufacturing (25.8%) and electricity (22.5%) all returned to positive growth in a yearly perspective.